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Monday, October 26, 2015

Integrating the Business of Modular Housing

Vertical
vs Horizontal vs Non-Integration

As a little
background to this article I have to go back to the October Builder Breakfast
where the featured speaker, Steve Kennealy, Dir of Modular Housing for MA, said "you have a good association in the MHBA but modular housing is not an industry.
Rather it is a group of separate factories that happen to build houses on a production
line and don’t really talk with each other."

I liked this
and for the time being I will change my thinking from the “Modular Home Industry”
to the “Business of Modular Housing.” I agree with Steve that we are not yet an
industry onto ourselves. Becoming an ‘industry’ will happen sooner rather than
later if Tom Hardiman, Dir of the MHBA, and I have anything to say about it. We
are approaching this ‘industry’ thing from two directions and I hope we can
make an industry out of just a bunch of factories having production lines.

Now back to
the problems of integration in the business of modular housing.

First, why is
it even a topic we should be talking about? That’s a simple question with three
distinct answers.

What is Vertical Integration?

Vertical
integration is the process in which several steps in the production and/or
distribution of a product or service are controlled by a single company or
entity, in order to increase that company’s or entity’s power in the
marketplace.

Simply said,
every single product that you can think of has a big life cycle. While you
might recognize the product with the Brand name printed on it, many companies
are involved in developing that product. These companies are necessarily not
part of the brand you see.

An example in
housing would be Toll Brothers or Ryan Homes. Each of them buy raw land,
develop it, put up sales offices, take orders for new homes, build them and
service them for one year…themselves. They don’t just build houses, they
produce a total experience for new home buyers.

Types of Vertical Integrations

There are
basically 3 classifications of Vertical Integration namely:

Backward integration – The example discussed above where Toll
Brothers and Ryan Homes tries to own all or most of the home building process.

Forward integration – Where the business tries to control
the post production areas, namely the distribution network. An example of this
would be Clayton Homes that do little land development but own some of the
sales process.

Balanced integration – You guessed it right, a mix of the
above two. A balanced strategy to take advantages of both the worlds. Most
commercial modular construction falls into this category.

What is Horizontal Integration?

Much more
common and simpler than vertical integration, Horizontal integration (also
known as lateral integration) simply means a strategy to increase your market
share by taking over a similar company. This take over / merger / buyout can be
done in the same geography or probably in other countries to increase your
reach.

Examples of
Horizontal Integration. A couple of examples are currently happening in modular
housing. IBS, where its’ mergers and acquisitions happen in order to increase
the reach of their business. Another is Express Modular who is the only
national modular home builder with sales reps and affiliate modular factories
throughout the US.

What is Non-Integration?

This occurs
when a company refuses to move either up or out but prefers to remain insular
and isolated from the rest of its competitors. A company using this strategy
most often remains in a non-growth state until it either ceases operation or is
bought out by either a vertical or horizontally integrated organization.

Most modular
factories fall into this category, owning only one factory, being insular and
isolated from others in the same business and not having any backup plan or group
in place in the event the economy changes.

A past
speaker at one of my Builder Breakfasts this year was Andy Gianino, owner of
The Home Store, who spoke on the need for factories to begin integrating themselves more into the home builder's business. He was widely received at
the time but quickly brushed aside as many modular factories withdrew back into
their insular worlds.

It really
doesn’t matter whether a factory embraces a vertical or horizontal approach in
the future but we will never become an “Industry” until we all leave the
Non-Integration category.

2 comments:

Anonymous
said...

Builders are more integrated than the factories. We do everything before the contract is signed including ground work, a lot of the set prep and all the finish work. That Caoach, is vertical integration. I have been with many factories over the years and only two have done more than draw the plans and build the house. I would really like to see how they could be more integrated into my business.

Most if not all national SFR construction companies are really land development companies that hold lot positions and then employ or engage project managers (builders) to manage the construction process while fielding a sales organization. They rely on BRAND recognition and community developments to bring in buyers.

This may be true as well for many regional SFR firms that control or build in or near metro areas. It can, also, be true for some factories that build, deliver, and set homes in a limited partnership with local or regional developers.

With very few exceptions I am UNAWARE of any modular builder who is acting as a land developer with small lot projects (4-20) that is using any one factory (transport issues) to develop and market modular only except those G/C's that are performing commercial projects but its their brand being for the most part marketed not the building system.

For now modular is more suited to horizontal expansion as the deep pockets acquire factories to increase there area of coverage for delivery. Maybe someday we will see a land developer/builder promote a sub-division as XYZ builder featuring homes by ABC modular. Clayton may be a forward thinking leader having recently acquired a regional land developer/builder with over 1000 lot land position.

With all due respect to Mr Kennealy modular production is and should be viewed as an integral part of the national housing industry by all respective stakeholders.